Question

Given the information in the table, what is TODAY’s price of the stock? Today’s Dividend $3.33 Discount Rate 5.77% Growth rate in dividends 0 to 1 8.53% Growth rate in dividends 1 to 2 7.13% Growth rate in dividends 2 to 3 5.21% Growth rate in dividends 3 onward 2.32%

Answer 1

The value of the stock is computed as shown below:

= Dividend in year 1 / (1 + required rate of return)¹ + Dividend in year 2 / (1 + required rate of return)² + Dividend in year 3 / (1 + required rate of return)³ + 1 / (1 + required rate of return)³ [ ( Dividend in year 3 (1 + growth rate) / ( required rate of return - growth rate) ]

= ($ 3.33 x 1.0853) / 1.0577 + ($ 3.33 x 1.0853 x 1.0713) / 1.0577² + ($ 3.33 x 1.0853 x 1.0713 x 1.0521) / 1.0577³ + 1 / 1.0577³ x [ (($ 3.33 x 1.0853 x 1.0713 x 1.0521 x 1.0232) / (0.0577 - 0.0232) ]

= $ 3.614049 / 1.0577 + $ 3.871730694 / 1.0577² + $ 4.073447863 / 1.0577³ + $ 120.8101986 / 1.0577³

= $ 3.614049 / 1.0577 + $ 3.871730694 / 1.0577² + $ 124.8836465 / 1.0577³

= $ 112.42